The Proper Explanation Of That Finnish Universal Basic Income Story

A couple of days back I was leaping up and down with glee, along with a number of other economic obsessives, about the news that Finland looks set to introduce a universal basic income. This is still true, various economic obsessives are still jumping up and down in glee at this news for we're all convinced that it's simply an excellent idea (see the earlier piece for why). But we're not absolutely certain that it will work out as intended. Sure, we think that getting rid of the vast tax and benefit withdrawal rates that the poor face will encourage more to go out to work. But it's also true that having a basic income could mean fewer do because they don't actually need to. And yes, others think that raising the reservation wage will mean that companies have to raise their wages thus reducing inequality. But we still don't want wage raises to run ahead of productivity, which they could do. So, there's a certain number of risks here: all involved in the debate over the years know that there's things that could go wrong. Indeed, we'd all say that some to all of them will go wrong. But as ever in economics that something happens isn't important: it's the size of what happens that is. And we're all generally assuming that while those bad things will happen the effects will be small, less than the effects of the good things.

But, of course, we could be wrong in this. So, the real joy of this Finnish proposal is that someone is going to test this out. In the real world, a whole country. And the bestest thing is that it's going to be in someone elses' country. We thus learn who is right without having to suffer any of the potential pain ourselves. Ain't that great?

As a result of that earlier piece the Finnish offshoot, I think they are at least, of the Demos network has been in touch to tell us why this policy is coming about. They've been pioneering a form of deciding upon public policy where people actually think through the problems at issue, think about them, consider solutions, test a few of them, then implement the best. Of course this is not different from the way all public policy is decided. After all, no country is run by politicians who just pull policy ideas out of their......ah, yes, that's where that little insult isn't going to work, isn't it? When Bernie tells us that his FTT will pay for college for all but his FTT will lose, not gain revenue, when Hillary tells us she will control HFT to make financial markets safe for the little guy when the one obvious and proven beneficiary of HFT is the little guy, when Donald tells us that he's going to round up all 12 million illegals and deport them without bothering to mention that we've had hundreds of thousands of people trying to do that for decades, Ben manages to take two facts, that the Federal government swallows 15% of GDP in tax revenues, that all GDP is income to someone, and turn those two into the idea that a 10% of GDP tax on incomes can pay for the 15% of GDP that the Feds spend: well, obviously, politicians are pulling policies from somewhere and it's not careful and deep consideration of the issues under discussion, is it?

So, well done to Demos then.

Which brings me to one point that I haven't seen mentioned yet. Which is that our current welfare system is a third best system, the universal basic income being a first best one. We can see this in the work of Milton Friedman and let's work backwards to get there.

The current system of in work benefits (working tax credits in my native UK, the EITC in the US, the WTC coming from the EITC) was in fact a design of Friedman's. What he actually wanted to do was have a negative income tax: but the country couldn't afford it. So the EITC instead. But that negative income tax was itself a second best solution to him. What he really wanted was a universal basic income. But he knew very well that the country couldn't afford that. Back in 1960s America a ubi would not in fact be a basic income: the country just couldn't afford it. It wouldn't even be a sustenance income, let alone a basic one. So that's what set him off down the path he took: paring away at the idea until he found something that could be afforded, that EITC, while still retaining at least some of the benefits of the original idea.

And now we're all 50 years richer. As these things go we're all about twice as rich as our various countries were in the 1960s. We might well be at the level where we can in fact afford that first best option, the ubi, instead of the third derivative of it that we currently have, in work tax credits. So, if we can now afford the best, why not have the best?

After, obviously, Finland has shown that it really does work as we and Milton think it will.

I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am....